TY - JOUR
AU - Ferguson,Niall
AU - Schularick,Moritz
TI - The "Thin Film Of Gold": Monetary Rules and Policy Credibility In Developing Countries
JF - National Bureau of Economic Research Working Paper Series
VL - No. 13918
PY - 2008
Y2 - April 2008
DO - 10.3386/w13918
UR - http://www.nber.org/papers/w13918
L1 - http://www.nber.org/papers/w13918.pdf
N1 - Author contact info:
Niall Ferguson
Minda de Gunzburg Center for European Studies
Harvard University
27 Kirkland Street
Cambridge, MA 02138
Tel: 617/495-4303 ext 203
Fax: 617/496-5994
E-Mail: nfergus@fas.harvard.edu
Moritz Schularick
University of Bonn
53113 Bonn, Germany
E-Mail: moritz.schularick@uni-bonn.de
M2 - featured in NBER digest on 2008-12-01
AB - This paper asks whether developing countries can reap credibility gains from submitting policy to a strict monetary rule. Following earlier work, we look at the gold standard era (1880-1914) as a "natural experiment" to test whether adoption of a rule-based monetary framework such as the gold standard increased policy credibility. On the basis of the largest possible dataset covering almost sixty independent and colonial borrowers in the London market, we challenge the traditional view that gold standard adherence worked as a credible commitment mechanism that was rewarded by financial markets with lower borrowing costs. We demonstrate that in the poor periphery -- where policy credibility is a particularly acute problem -- the market looked behind "the thin film of gold". Our results point to a dichotomy: whereas country risk premia fell after gold adoption in developed countries, there were no credibility gains in the volatile economic and political environments of developing countries. History shows that monetary policy rules are no short-cut to credibility in situations where vulnerability to economic and political shocks, not time-inconsistency, are overarching concerns for investors.
ER -